EUR/JPY Stuck in Consolidation as Intervention Risks Mount

The EUR/JPY pair has been hovering near its lows due to rising intervention risks from Japan. The Bank of Japan raised its policy rate by 25 basis points to 1.25%, but market expectations for further tightening are uncertain. According to swap markets, there's less than a 20% probability of another rate hike at the end-October meeting and around a 90% chance of one in December.

The Bank of Japan's cautious stance has weighed on the yen, which weakened sharply against the US dollar despite the rate hike. Japanese officials have conducted 'exchange-rate checks' to gauge current rates and market conditions, signaling potential intervention efforts. This has amplified market attention on official efforts to stabilize the currency.

Eurozone interest rates also play a significant role in EUR/JPY dynamics. European Central Bank President Lagarde stated that future rate decisions will be assessed meeting by meeting based on economic data, with low probability of rate cuts currently. The euro enjoys an interest-rate advantage over the yen, supporting EUR/JPY.

However, rising energy prices could intensify Japan's inflationary pressures and bolster the case for further rate hikes. Conversely, a decline in oil prices would temper market expectations. Intervention risks from Japan remain a key focus for the FX market as it navigates these uncertain policy outlooks.